Can This Struggling Tech Giant Succeed in BPO?

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Hewlett-Packard (NYSE: HPQ) has released a new business process outsourcing (BPO) solution to help consumers enjoy the benefit of operational agility. The new solution will also enable organizations maintain quality and ensure transparency, eliminating manual workarounds when tackling operational challenges. Below, I will discuss how BPO market trends will not favor the sales of Hewlett Packard's new product. I particularly want to look at the effect of the shifting tastes of consumers on this product. The combination of these factors will not enable HP to sell more of its product and improve the company's price multiples.

<img src="http://static.cdn-seekingalpha.com/uploads/2013/2/2386701_13614596923295_rId6_thumb.jpg" />

Why will Hewlett-Packard not achieve significant sales growth with the new BPO solution? Many executives are yet to be sold on the strategic benefits of BPO in general. In this chart, HfS Research, the leading authority for the global services industry, reveals the result of its 2013 State of Outsourcing study. It caters for areas such as application development, finance and accounting, human resources and others. All the sectors showed that more than 50% of respondents either wanted to stay the same, decrease the scope, or had no plans to outsource. Less than 10% of respondents wanted to start outsourcing for the first time. Respondents either wanted to stay the same or had no plan to outsource. This trend will likely negatively impact sales of Hewlett-Packard's new BPO product.

Financials

Hewlett Packard announced in its fourth quarter 2012 earnings report that its full-year fiscal 2012 net revenue was $120.4 billion, down 5% from the prior-year period and down 4% when adjusted for the effects of currency. The company's full-year GAAP loss per share was $6.41, down from $3.32 in the prior-year period. Full-year non-GAAP diluted EPS was $4.05, down 17% from the prior-year period.

The company also reported fourth quarter net revenue of $30.0 billion, down 7% year over year and down 4% when adjusted for the effects of currency. GAAP loss per share was $3.49, down from diluted EPS of $0.12 in same period in 2011. Non-GAAP diluted EPS was $1.16, down 1% from the same period in the year earlier. Revenues for Enterprise Servers, Storage and Networking (ESSN), directly in charge of BPO, declined 9% year over year with an 8.3% operating margin., Industry Standard Servers revenue was down 7%, Business Critical Systems revenue was down 25%, and Storage revenue was down 13% year over year.

HP president and CEO Meg Whitman said, "As we discussed during our Securities Analyst Meeting last month, fiscal 2012 was the first year in a multiyear journey to turn HP around."

In its third quarter 2012 report, Hewlett Packard reported that GAAP loss per share was $4.49, down from $0.93 in the prior-year period. Non-GAAP diluted EPS was $1.00, down 9% from the same period in 2011. Enterprise Servers, Storage and Networking (ESSN) revenue declined 4% year over year with a 10.9% operating margin. Industry Standard Servers revenue was down 3%, Business Critical Systems revenue was down 16%, and Storage revenue was down 5% year over year.

"HP is still in the early stages of a multi-year turnaround, and we're making decent progress despite the headwinds," said Whitman. "During the quarter we took important steps to focus on strategic priorities, manage costs, drive needed organizational change, and improve the balance sheet."

Hewlett-Packard and BPO

Hewlett Packard has a number of BPOs in the market. They provide industry-specific solutions to key business processes in select industries. The industries include communication, media,and entertainment; energy; financial services; health and human services; manufacturing; and travel and transportation.

The new BPO software is designed as a solution to streamline a number of finance and accounting procedures. It helps organization to decrease manual intervention and enhances e-invoicing for accuracy and more efficient payment processes.

"Today's chief financial officers are plagued with diminishing resources and the growing complexity of processes and technology," said Danila Meirlaen, vice president, Business Process Outsourcing, HP Enterprise Services. "HP AutoFlow builds on our strong history in finance, administration and technology to increase process automation and optimize cost structures, so clients can focus on revenue-generating activities."

It is clear that the BPO solution is among Hewlett Packard's first products released to the market in 2012. Unfortunately, this line of product is not proving popular with time, and gaining a head start early in the year over its rivals will not prove profitable to Hewlett Packard in the long run.

When we recall the performance of the Enterprise Division in Hewlett Packard's recent earning reports, it is clear the company has not been improved in comparison to its 2011 reports, so it can be said that the company is not operating at an efficient level.

Competition

With gross margin of 24.19%, compared with 30.86% for Accenture, 60.70% for Cisco, and 51.76% for IBM (NYSE: IBM), and earnings per share of -6.41, compared with 3.61 for Accenture, 1.47 for Dell (NASDAQ: DELL) and 1.74 for Cisco, Hewlett-Packard does not seem to be ahead of others.

The BPO market is crowded. To mount a challenge in the BPO sector, IBM reasserted itself with its recent bumper Cemex deal, and its Source To Pay software is in the market. Cemex is Mexico's top cement maker, and it started outsourcing jobs to IBM in September 2012 as part of a deal that will help it save $1 billion over 10 years. Cemex took a big hit from the collapse of the U.S. housing market after the company paid out nearly $16 billion to buy Rinker, an Australian-based building products company. The outsourcing deal with IBM could impact 1,500 and 2,000 jobs. The transition is expected to be completed by December 2013.

Dell's Business Process Services has a number of BPOs, and they will pose a strong competition. For example, Dell has positioned itself against an ambitious group of Indian outsourcing rivals. For India, customer services make up the biggest segment of BPO exports from India. Nasscom, a software industry firm, estimates it will "account for nearly 42% of all BPO exports from the country in 2012." Finance and accounting services make up 22% of all BPO exports in the country. Dell is already a large player here, and runs a large operation for accounting, procurement and other services for its global business. 

Conclusion

Looking at the previous performance of Hewlett Packard's BPO solutions, the competing products, the dim forecast for the sector, and the worsening margins, I can say that Hewlett Packard's new product will not improve price multiples. Conclusively, the stock is not a good buy at the moment based on the above mentioned factors.


StockCroc1 has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus